[Hong Jang-won’s Bull and Bear] Market fear peaks: Will the trend recover, or is this a dead cat bounce?

An independent exercise, not a statement by the video creator or verification of every claim in the video.

Comparing losses for two funds with the same net exposure

Assume two hypothetical funds each have net assets of 100. A holds 120 long and 80 short. B holds 80 long and 40 short. Both have 40% net exposure, while gross exposure is 200% for A and 120% for B. If each fund’s long holdings fall 10% and its shorted stocks rise 10%, A loses 12 on its longs and 8 on its shorts, for a loss of 20. B loses 8 and 4, for a loss of 12. If both sets of stocks instead fall 10%, short gains offset part of the long losses and each fund loses 4.

Check for yourself

1. If net exposure fell, what figures would tell you whether the fund sold longs or added shorts?
2. Can you estimate losses from net exposure alone if the long and short holdings move differently than usual?

Limits of application

This example assumes simple price changes in cash equities and short sales. It excludes transaction and borrowing costs, margin, individual stock sensitivities and derivatives.